Why The Rising Stock Market Should Scare You Silly
The Federal Reserve is pouring money into the financial markets. “Bailouts”, “Stimulus”, or funny Fed-speak, “The Term Asset-Backed Securities Loan Facility” etc. The result is easy to see, even for those who don’t know DOW from NASDAQ. Stocks are becoming more valuable while the businesses underlying them, well, you walk by them and they’re headed for bankruptcy and boarded up!
How is that possible?
Contrary to popular opinion, the Fed doesn’t work for the top 1%. It works for the top 50%*. And those people don’t want the businesses behind their retirement assets running out of money and going broke.
In a sense, the financial market is like any flea market. The Fed can manipulate activity by changing fees paid and rebates to the tables selling their wares. (Wait, that was the old days. Today the Fed will also buy bonds that can’t be sold!)
Many people believe the value of money is the $5 they spend for a latte. The Fed once cared about that kind of money, not so much any more.
If 50 million households in the U.S. plan to retire by selling assets in their retirement accounts, which are held mostly in mutual funds (stocks and bonds), aren’t they motivated to keep those companies in business? Yes.
In theory it’s easy to say you want the “free market” to allocate capital where needed. In real life, you want to take your money out when you want it. The Fed is on your page!
The Fed doesn’t plan this consciously. This isn’t a conspiracy. It’s wired into how the upper-middle class works, of which the Fed is a part. The wealthy help the wealthy because they intuitively understand that they need to help each other — not because they want to help any particular wealthy person or corporation. It’s more of a neighborhood thing. The stock market is a neighborhood for people with stored wealth.
Most of my friends ask me why the stock market keeps rising. I keep saying because no one cares about how much money any company or person makes or loses. All they care about is their current income. Until they’re seriously worried about losing that income, they ignore the stock market. That leaves those who trade stocks in the market to play their game disconnected from the economy.
The tens of millions of workers who lost their jobs generally don’t have 401Ks or IRAs.
Wealthy Americans trust the Fed. It saved their retirement funds and house prices in 2008. It’s saving them again.
Can it work again?
Yes. It is today, so can tomorrow and tomorrow and tomorrow…
Until the bankruptcies start filing in the market can reach for the stars!
What could get in the way?
A simple change in perception. There are no charts or numbers or statistics that can tell anyone when this might happen, if it will happen.
That perception is when the owners of equities decide the companies underlying the stocks can’t be saved by loaning them more money. In the future, investors may perceive that non-cash generated assets, like gold, silver or bitcoin will be worth more than their money-generating stocks and bonds. It sounds preposterous now. It did before every other financial panic in the past 5,000 years.
Why would people panic and start selling? Everyone who has money in the stock market today understands that corporate profits are not driving asset values. Indeed, the Fed has been hammering even the dullest onlooker with that simple fact.
Sure, most people don’t understand anything about monetary policy. But, they understand when they’ve just made money they didn’t really earn. They subconsciously remember what happened to Pinocchio’s friend Lampwick, when he stayed too long on “Pleasure Island.”
As long as things don’t add up, but they’re still benefiting, they’ll stay in the game. Who wouldn’t? Nonetheless, the Fed is making everyone uneasy. What is the Fed’s long term plan? Do they have one?
There are many bankruptcies heading our way. If money goes into bankrupt businesses which ends up surviving, okay. But if the businesses doesn’t survive, the money simply goes into the pockets of the executives, investment bankers, lawyers, accountants and liquidators. Not the investor.
How often have you seen this headline? “Executive management at _____ gives themselves $ ____ bonuses month before declaring bankruptcy”?
As bankruptcies increase, investors begin to worry that they’re not saving the market, they’re only being swindled out of their money. Such emotions drive panics. The ingredients are 1) A shrinking economy 2) Newly created money loaned to support failing businesses 3) The perception that one is getting played.
Ironically, the Fed often talks about “ammunition” as if ammunition fixes anything. Ammunition kills. The question is who.
* In ICI data, it reports that 50 million households, or 100 million individuals (half working population) has assets with median value of $150,000.
